Update: Head to our latest article on National Insurance changes in 2022 to learn about the impact of multiple changes in 2022 on small businesses.
How can small businesses prepare for the National Insurance tax increase next year? Myhrtoolkit's Accounts Manager, Lindsay Dale explains how the increase will work and what organisations can do for the business and for staff.
The UK government recently announced that there will be an extra tax for funding health and social care in England, starting from the next tax year. Employers, employees, and self-employed people alike will have an initial 1.25% rise in National Insurance from April 2022 onwards.
The purpose of this raised tax is to ease pressure on the NHS by raising £12 billion. Scotland, Wales, and Northern Ireland will also receive extra funds to spend on services.
The tax will start as a 1.25% rise in National Insurance, then becoming a separate tax levy from April 2023, which will separately appear on staff payslips.
What are the costs for small businesses?
The decision to raise National Insurance costs has been heavily criticised by the UK business community, with the British Chamber of Commerce calling it “a drag anchor on jobs growth”.
The increase means that employers would be expected to pay approximately £6.5 billion and employees £4.3 billion. As an example, a basic rate taxpayer earning £24,100 would pay £180 a year due to the raise.
The proposed tax increase has been particularly concerning for small businesses, many of whom are already struggling to keep afloat after the impact of the pandemic. Small businesses and their employees are less likely able to bear the impact of the increased costs than bigger firms, due to fewer assets and cashflow available.
The tax hike will likely have an impact on small business recruitment, with SMEs having to pay more to recruit an employee – and employees are already a big cost factor in terms of investment and turnover! Also, the extra money sunk into NI contributions will impact the business elsewhere in terms of being an attractive option for talented workers, as businesses may need to make cuts on areas like training and benefits.
Preparing your small business for the National Insurance hike
How can you prepare your SME for these new costs at the start of the new financial year? Here are a few pointers:
1. Estimate the cost
It will be wise to work out what the National Insurance hike will mean in terms of actual costs to your business, especially as this is one of the main costs of having employees. Estimate how much the increase will impact your business and then you can plan and budget accordingly.
2. Prepare your staff
Employees will be paying in more for National Insurance contributions too, so this will be reflected in their pay checks. Communicating to employees about the changes and how they will be affected in advance will stop surprises down the line and help with staff financial wellbeing.
3. Checking your payroll software
Your payroll software should update annually, so would reflect any percentage changes once National Insurance has been raised.
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Written by Lindsay Dale
Lindsay is the Accounts Manager for myhrtoolkit who keeps everything running smoothly in terms of our company finances and payroll.